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Downloaded from the Innovations for Successful Societies Website, Users Must Read and Accept the Terms on Which We Make These Items Available CHANGING A CIVIL SERVICE CULTURE: REFORMING INDONESIA’S MINISTRY OF FINANCE, 2006–2010 SYNOPSIS By the mid-2000s, Indonesia had recovered from a devastating economic crisis and made significant progress in transitioning from a dictatorship to a democracy. However, the country’s vast state bureaucracy continued to resist pressure to improve operations. In 2006, President Susilo Bambang Yudhoyono tapped economist Sri Mulyani Indrawati to transform Indonesia’s massive Ministry of Finance, which was responsible not only for economic policy making but also for taxes and customs. During four years as minister, Mulyani introduced new standard operating procedures, raised civil servant salaries, created a new performance management system, and cracked down on malfeasance. Her reforms turned what had once been a dysfunctional institution into a high performer. But ongoing resistance illustrated the difficulties and perils of ambitious bureaucratic reform in Indonesia. This case study was drafted by Gordon LaForge based on research by Rachel Jackson, Drew McDonald, Matt Devlin, and Andrew Schalkwyk and on interviews conducted by ISS staff members from 2009 to 2015. Case published May 2016. Other ISS case studies provide additional detail about certain aspects of the reforms discussed in this case or about related initiatives. For example, see “Instilling Order and Accountability: Standard Operating Procedures at Indonesia’s Ministry of Finance, 2006–2007.” INTRODUCTION In 1998, the Asian financial crisis pummeled embraced reform. The era of Reformasi—a Indonesia’s economy. Rising unemployment and government-wide effort to transform Indonesia’s the increasing cost of imports triggered mass centralized autocracy into a decentralized, demonstrations, riots, and eruptions of communal democratic state—had begun. violence across the country. When Suharto, leader The immediate priority was to salvage the of the country’s authoritarian government, finally economy. The crisis had brought 35 years of stepped down, after 31 years in office, it was continuous economic growth to an abrupt halt. unclear what kind of political system would fill the During a half-year period in 1998, gross domestic vacuum. Some feared that this sprawling product (GDP) contracted by one-sixth, which archipelago, with more than 300 ethnic groups and represented the sharpest economic downturn the world’s fourth-largest population, would split experienced by any nation since World War II. apart. But the nation held together, and, shaken by Unemployment spiked, and the banking system the popular uprising, political and military leaders collapsed. The International Monetary Fund (IMF) ISS is a joint program of the Woodrow Wilson School of Public and International Affairs and the Bobst Center for Peace and Justice: successfulsocieties.princeton.edu. ISS invites readers to share feedback and information on how these cases are being used: [email protected]. © 2016, Trustees of Princeton University Gordon LaForge Innovations for Successful Societies loaned the government $43 billion in liquidity As part of fulfilling his pledge to voters, aid—conditional on economic reform. Yudhoyono wanted to reform the Ministry of Emergency measures stopped the meltdown. Finance, which had an especially bad reputation But by 2001, growth was still tepid and for corruption. In a 2001 national survey, international investors remained skeptical that the households and businesses alike said that of 33 government could stand on its own financially.1 public institutions, the ministry’s customs authority Restoring confidence and spurring economic was the second most corrupt—only slightly less growth were the dual mandates given to Boediono, odious than the traffic police. The tax directorate who was tapped to head the Ministry of Finance. general ranked fifth worst on the same list.4 In (Like many Indonesians, he had only one name.) 2006, local daily newspaper the Jakarta Post said the A highly respected technocrat and former tax directorate had “long been seen as the deputy governor of the central bank, Boediono put country’s most corrupt institution.”5 The first the economy back on solid footing. Policies he minister of finance the president appointed failed enacted stabilized the currency, increased foreign to implement Boediono’s reform plan or take on reserves, and slowed the rate of capital flight. He entrenched interests, however. The president also boosted short-term state revenue by pushing needed someone tougher. modest reforms through the ministry—notably, by Yudhoyono turned to Sri Mulyani Indrawati, a restructuring tax offices and improving efficiency talented economist who had been an executive in customs administration. director at the IMF. As the head of BAPPENAS, Though Boediono failed to enact bureaucratic Indonesia’s National Development Planning reform at the Ministry of Finance, he did lay some Agency, she had built a relationship with the groundwork. A wide-ranging 2003 economic president and proved herself capable and bold. In policy package known as the White Paper called 2005, Yudhoyono appointed Mulyani as finance for, among other things, improving the minister and gave her arguably the nation’s hardest transparency of public services, synchronizing job: the reform of a dysfunctional and highly regional and national regulations, and increasing resistant 64,000-person bureaucracy on which the the efficiency of government spending.2 With the economy of a still-fragile nation depended. help of McKinsey & Company consultants, Boediono and his team drew up a plan for THE CHALLENGE ministerial reorganization. And before leaving At the time that Yudhoyono appointed office, he secured a World Bank loan to fund Mulyani finance minister, Reformasi had continued future reform in the Ministry of Finance. to march steadily forward. The country’s police, In 2004, for the first time, Indonesians went military, and political institutions had all been to the polls to directly elect their president. They revamped (see textbox 1). But so far, the vast state chose former general Susilo Bambang Yudhoyono, bureaucracy and its 4 million civil servants had sold on his promise to eradicate public corruption. blocked change. Although the Suharto government had been Under Suharto, state bureaucracies had been spectacularly corrupt—by Transparency extractive institutions whose employees often International’s estimate, pillaging as much as $35 charged citizens extra for services, channeling billion in public funds during Suharto’s rule3— some of this revenue to the head of state and his state crime had become less formalized and more inner circle. When Suharto stepped down, the visible since his monopoly on it dissolved. The criminal and patronage practices incubated within watchdog’s 2005 Corruption Perceptions Index that system were so engrained and so many people ranked Indonesia in the bottom eighth of the 159 depended on the money the practices captured countries surveyed, receiving the same score as that it would be very hard to introduce new ways Iraq and Liberia. of working. © 2016, Trustees of Princeton University Terms of use and citation format appear at the end of this document and at successfulsocieties.princeton.edu/about/terms-conditions. 2 Gordon LaForge Innovations for Successful Societies Textbox 1 Institutional Change and Reformasi The first five years of Reformasi brought significant institutional change, though much still remained to accomplish. The central government devolved significant authority to districts in a sort-of big-bang decentralization program: The police and military became separated from each another, made subject to oversight and extricated from most business interests and political functions (though informal links still existed). Leaders created an independent corruption eradication commission, one of the strongest in the world. Elections became free and relatively fair. Political parties other than Golkar, the former ruling party, gained power and new ones emerged. And the parliament became independent, establishing separation of powers. The finance ministry reforms began in that context, but as public pressure diminished and the implications of clean government became clearer, entrenched interests began to push back. Entry into the civil service was based on a compensation was only Rp20 million (US$1,400) single examination, after which an employee was per month. Various “allowances” were tacked on essentially guaranteed a job until retirement. Rather to base salaries, but total compensation still fell than merit or ability, promotions were based on well short of the private sector’s. seniority, personal relationships, or, simply, Those disparities helped drive corruption in willingness to pay. Regulations made it nearly the civil service. Fixing labor compensation at low impossible to fire a civil servant except in cases of levels relative to market prices had produced what criminal wrongdoing. Even then, an arduous was essentially a black market for remuneration, appeals process made it difficult to remove whereby civil servants sought favors, extracted employees who broke the law. bribes, and embezzled public funds to bring their “You cannot just lay off nonperforming civil pay in line with what the private market had servants,” Boediono said in an interview. “It’s the determined their skills and seniority were actually baggage you have to carry.” According to a 2008 worth. Although the civil service law was amended World Bank Ease of Doing Business
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